Ready to make a major life purchase in the near future? Paying for a house, a car, wedding or college tuition can be overwhelming, but there are ways to carve out enough savings without putting the rest of your life on hold.
No matter what you’re saving for, there are a few general best practices to follow:
Set your timeline and monthly savings goals
A good first step is to calculate how much you’ll need to save, and for how long, to meet your goals. Want to make an $8,000 purchase in two years? If you save $333.34 a month over 24 months, you’ll reach your goal.
Breaking down large purchases into more manageable chunks can ease your financial burden by helping ensure you don’t have to set aside a large sum of money at once. Setting a specific goal also has psychological benefits: Those who clearly define and describe their goals are more likely to achieve them.
It's also a good practice to create a spending plan to help determine how much you can save while having enough left over for necessities. In general, we recommend creating a detailed budget, but if you are more likely to make and stick to one with broad categories try that instead. Mapping out your monthly budget can help you see where you’re spending unnecessarily each month so you can allocate that money to your big purchase instead.
Once you have a monthly figure to shoot for, you can use it to inform the rest of your savings strategy.
Automate your savings
A surefire way to help stay on track with your monthly savings goals is to set up an automatic funds transfer from your checking account to your savings account every month. You’ll never forget to save, and it can help keep you from dipping into that savings throughout the month with small purchases here and there.
If your company pays you through direct deposit, you could also set up a system in which a small sum of money is deducted from your paycheck and put into your savings or investment account instead of your checking account.
If you’re zeroing in on one major purchase, it can be a good idea to open a new savings or investment account dedicated to that purchase. That way, you’ll easily see exactly how much you have set aside for it.
Invest your money
If you have several years to save for a big purchase, then you have time to invest your money so that your savings can grow. Consider investing your savings in a manner that is consistent with your risk tolerance and time horizon. Your financial advisor can help you invest these funds in a way that can help you achieve your goal. And if you’re on a shorter timeline, open an Edward Jones Flex Funds® account, which can help you track progress toward your short-term goals.
By investing in a portfolio that is consistent with your time horizon and risk tolerance, you gain the potential to earn a return on your funds while maintaining an appropriate amount of risk for your goal.
Consider micro savings
What if you don’t have a lot of money left to put aside after essential expenses? Micro saving is a strategy that focuses on putting away small sums of money here and there so you don’t need to change your habits drastically. Many banks offer a service that rounds up your transaction price to the next dollar and automatically puts the additional amount into a savings account. For example, you can have the service automatically save a little extra money whenever you buy a cup of coffee.
On top of these best practices, some specific strategies may work better for certain purchases. Here are a few tips for saving for three major life purchases:
1. Saving for a house
Seek loan assistance: Some people think they need a 20% down payment to buy a home, but you may be able to get a conventional mortgage loan with as little as 3% down. However, it's important to weigh the benefits of a smaller down payment with its costs. Smaller down payments mean higher monthly mortgage payments and may require additional expenditures such as private mortgage insurance or higher interest rates.
2. Saving for a car
Sell or trade your current car: Trading in your car is an effective way to help fund your next car purchase and lower the overall amount you’ll owe on your new vehicle. You can get a sense of your car’s trade-in value with pricing guides such as Kelley Blue Book and Edmunds.
3. Saving for college
Consider a 529 plan: These are state-sponsored education savings plans that can be used for higher education expenses. 529 plans are tax-advantaged, and the money you put into them goes into investments, such as mutual funds and exchange-traded funds, so that your money has the potential to grow over time. Investments in a 529 plan will fluctuate and may be worth more or less than the original investment when redeemed.
How Edward Jones can help
Talk to your financial advisor about other steps you can take to prepare for big purchases.